Banks, finance companies lose weight despite record earnings

Even as banks and finance companies are reporting record-high earnings, their weighting in the benchmark National Stock Exchange Nifty50 Index has seen a downward trajectory. Investors expect a stronger performance from other sectors in the new year.

Currently, banking, financial services and insurance (BFSI) companies collectively hold a weighting of 34.5 per cent, down from 36.7 per cent at the end of December 2022 and a record high of 40.6 per cent at the end of December 2019.

This represents the sector’s lowest weighting in the index since December 2021 when it stood at 33.7 per cent.

In comparison, the combined net profit of listed BFSI companies surged by 31 per cent year-on-year (Y-o-Y), reaching an all-time high of Rs 1.09 trillion during the July-September quarter (Q2) of 2023-24 (FY24).

Meanwhile, the combined earnings of all listed companies increased by 38 per cent Y-o-Y to Rs 3.07 trillion, slightly down from Rs 3.18 trillion in the first quarter of FY24.

However, excluding oil-marketing companies such as IndianOil, Bharat Petroleum, and Hindustan Petroleum, the combined net profit of the rest of the non-BFSI companies increased by 23.9 per cent Y-o-Y in Q2FY24, reaching Rs 1.4 trillion.

The decline in BFSI weighting in the index is attributed to the relative underperformance of banks, which dominate the BFSI space.

For instance, the banking sector index, Nifty Bank, has only increased by 11 per cent year-to-date in 2023, compared to an 18 per cent rally in the Nifty50.

Analysts attribute this to investors’ pessimistic view of banks’ earnings in 2024-25 (FY25).

Dhananjay Sinha, head of equity and strategy at Systematix Institutional Equities, explains, “Banks experienced robust earnings growth in the past two years, but their earnings outlook is not very bullish.

"In contrast, the market remains very bullish on sectors such as automotive, fast-moving consumer goods (FMCG), power, and infrastructure.”

According to Sinha, banks’ earnings in the past two years were boosted by multiple tailwinds, such as a sharp decline in provisions for bad loans, margin expansion, and double-digit growth in loan books.

“Many of these tailwinds would vanish in FY25, and there has been a steady deterioration in the quality of banks’ earnings in the last two quarters, such as a decline in margins amid rising competition in the retail loan segment,” he adds.

Others argue that the decline in BFSI sector weighting simply reflects a relatively better performance by other sectors.

Chokkalingam G, founder and managing director of Equinomics Research, says, “BFSI companies also contributed to the rally and saw an increase in their share price, but the rally was much stronger in sectors such as automotive, power, infrastructure, and information technology (IT) services.

"As a result, these sectors saw an increase in their index weightings while BFSI companies lost out a bit.”

However, Chokkalingam remains bullish on the prospects of banks and finance companies, citing continued double-digit growth in retail credit and a reversal in the interest rate cycle.

The power sector, including stocks such as NTPC and PowerGrid, has been the biggest winner.

The sector’s weighting in the index has more than doubled to nearly 4 per cent now from 1.8 per cent a year ago.

The construction and infra sector also outperformed, with the combined weighting of Larsen & Toubro and Adani Ports & SEZ rising to 5.7 per cent from 4.4 per cent a year ago.

Automakers such as Maruti Suzuki India, Tata Motors, Mahindra & Mahindra, and Bajaj Auto have also increased their presence in the index, with the sector’s weighting now at 6.5 per cent, up from 5.4 per cent a year ago.

IT services exporters such as Tata Consultancy Services, Infosys, and HCLTech, and FMCG majors such as ITC, Hindustan Unilever, and Nestlé also outperformed the broader market in 2023, despite a deterioration in their growth and earnings in Q2FY24.

Analysts attribute the outperformance of the IT services and FMCG sectors to market expectations of a turnaround in corporate earnings in these two sectors in FY25 after two years of muted growth.